Newton watched an apple and asked how far it could fall. When investors watch Apple’s share price they ask a similar question because the answer helps tell them when the upward momentum will stop.
The key question for Apple is not how far it can rise. The key question is how far Apple stock can fall before the fall becomes a signal of a change in trend.
A fall, or retreat, that is not a change in trend is a buying opportunity. A fall that is significant enough to signal a change in trend is a sell signal to lock in profits.
The size or daily range of the fall provides little indication of the threat to the trend. A large range on a day with increased distance between the high and the low is not an end of trend signal.
Typically, as the upward trend momentum slows the volatility also reduces. The trading range for each day shrinks. The rollover of an uptrend into a downtrend often starts with reduced intraday volatility. There are no sudden collapses with large price range days.
The weekly Apple chart shows a steady rising trend that is well supported by a wide separation in the long term group of moving averages on a Guppy Multiple Moving Averages (GMMA) display.
The GMMA use two groups of moving averages. The short term group shows the activity of traders. The long term group shows the activity of investors. The retreat to $520 in February was temporary.
The long term GMMA remains well separated and showed little response to the retreat activity. This indicated that investors were still strong buyers. The breakout from the upper edge of the down sloping trading channel in March was a new buy signal around $570.
A change in the trend direction is signaled by three developments. The first is when the short term GMMA compresses and dips into and below the value of the long term GMMA.
The second is when the long term GMMA also compresses and begins to develop a downward trend.
The third is when the short term GMMA moves below the lower edge of the long term GMMA.
These are the key conditions of a trend change and investors and traders watch for these conditions to develop. The uptrend in Apple remains in place until the end of trend conditions develop. This makes the dips a buying opportunity.
In this type if rising trend the focus is on developing exit conditions and not on how high the trend may go. This is managing profits.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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